Khoi Senderowicz (right) goes over shingling installed by roofer Rudy Diaz on one of her Berkeley homes.

Khoi Senderowicz (right) goes over shingling installed by roofer Rudy Diaz on one of her Berkeley homes.

Photo: Sam Wolson, Special To The Chronicle

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Senderowicz holds stucco siding booklets.

Senderowicz holds stucco siding booklets.

Photo: Sam Wolson, Special To The Chronicle

Image 4 of 11

Khoi Senderowicz, a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on the roof of one of Senderowicz's homes in Berkeley on October 28th 2013. less

Khoi Senderowicz, a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on the roof of one of Senderowicz's homes in Berkeley on October 28th ... more

Photo: Sam Wolson, Special To The Chronicle

Image 5 of 11

Khoi Senderowicz (left), a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on one of Senderowicz's homes in Berkeley on October 28th 2013.

Khoi Senderowicz (left), a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on one of Senderowicz's homes in Berkeley on October 28th 2013.

Photo: Sam Wolson, Special To The Chronicle

Image 6 of 11

Khoi Senderowicz, a Berkeley rental property owner, inspects the new shingling roof installed on one of her homes in Berkeley on October 28th 2013.

Khoi Senderowicz, a Berkeley rental property owner, inspects the new shingling roof installed on one of her homes in Berkeley on October 28th 2013.

Photo: Sam Wolson, Special To The Chronicle

Image 7 of 11

Khoi Senderowicz (right), a Berkeley rental property owner, and Rudy Diaz, a professional roofer, look over potential stucco options for one of Senderowicz's homes in Berkeley on October 28th 2013.

Khoi Senderowicz (right), a Berkeley rental property owner, and Rudy Diaz, a professional roofer, look over potential stucco options for one of Senderowicz's homes in Berkeley on October 28th 2013.

Photo: Sam Wolson, Special To The Chronicle

Image 8 of 11

Khoi Senderowicz (left), a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on one of Senderowicz's homes in Berkeley on October 28th 2013.

Khoi Senderowicz (left), a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on one of Senderowicz's homes in Berkeley on October 28th 2013.

Photo: Sam Wolson, Special To The Chronicle

Image 9 of 11

Khoi Senderowicz, a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on one of Senderowicz's homes in Berkeley on October 28th 2013.

Khoi Senderowicz, a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on one of Senderowicz's homes in Berkeley on October 28th 2013.

Photo: Sam Wolson, Special To The Chronicle

Image 10 of 11

Khoi Senderowicz (right), a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on one of Senderowicz's homes in Berkeley on October 28th 2013.

Khoi Senderowicz (right), a Berkeley rental property owner, and Rudy Diaz, a professional roofer, inspect the new shingling roof installed by Diaz on one of Senderowicz's homes in Berkeley on October 28th 2013.

Photo: Sam Wolson, Special To The Chronicle

Image 11 of 11

Hard money a costly quick fix for property owners

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Khoi Senderowicz needed capital to rehab her run-down rental properties, but her credit was shot from a foreclosure during the housing downturn.

Spurned by banks for a home-equity loan, she turned to "hard-money," high-interest, short-term loans secured by real estate and issued by individuals or small private companies. She borrowed $200,000 as a second mortgage against a duplex she owns in Oakland's Montclair neighborhood that has substantial equity.

"I feel like I can breathe again now," she said. "I had been juggling with nothing."

Her two-year loan came with a hefty price tag: 12 percent interest - almost triple today's rates - and four points, or $8,000.

Senderowicz and other real estate investors say paying a premium for hard money is worth it for super-quick access to funds. Hard money, despite technically being loans, helped fuel the surge in all-cash offers seen nationwide and in the Bay Area.

"We offer speed with not a lot of paperwork," said Glen Goldan, CEO of hard-money lender REprop Financial in Eureka. "We don't care about your credit, but we want to know how you're going to repay us."

It works for investors

The biggest users of hard money are individual real estate investors who emerged in force during the downturn to buy, fix and flip foreclosures. Exact numbers on hard-money loans are unknown as there's no requirement to disclose their use. Guy Cecala, publisher of Inside Mortgage Finance, estimates that they're less than 1 percent of the mortgage market. The fact that the vast majority of borrowers are professionals rather than owner-occupants alleviates concerns that hard money is another form of subprime lending.

"The conventional mortgage market has blacklisted (real estate) investors as too high risk because we just came out of a credit crisis where investor loans defaulted at three times the rate of owner-occupied, so everyone's gun-shy," Cecala said. "That's creating an opportunity for hard-money lenders."

Hard money "provided real estate investors with much-needed capital so they could purchase and remodel thousands of distressed and older homes throughout the Bay Area these past four years," said Mark Hanf, who runs Pacific Private Money, a Novato hard-money lender.

Josh Roofener, who runs Beyond the Horizon Construction in Oakley, said he's been using hard money to buy and rehab foreclosures.

"It's more expensive, but gets you the cash you need in the time frame you need," he said. "I use hard money to make all-cash offers, which are always stronger because people with regular mortgages have to jump through a lot more hoops."

Worth the price

Senderowicz said she doesn't feel the 12 percent interest was unreasonable.

"Credit cards charge that much interest all the time, but just dole the money out in smaller portions," she said. "And because this is a home loan, I'll get a (tax) write-off on the interest; you don't get that with credit cards."

People who borrow hard money must have more "skin in the game" than conventional borrowers. Usually at least 30 percent of a property's value must come out of their pocket.

Hard-money lenders, who must have a real estate license or a finance lenders' license, don't scrutinize borrowers' assets and financial histories. Still, under today's stricter lending laws, they are supposed to verify income, and, like banks, must provide borrowers with simple disclosures of loan terms and costs. Lenders also get property appraisals to document that there's enough collateral to back a loan. "Flipper" borrowers have to show plans for rehabbing a property and local comparable sales to support the eventual price they hope to get, Roofener said.

Many hard-money lenders are individuals who relish the chance to earn 9 percent or more on their funds - and can tolerate the associated risk. Often they go through brokers like Pacific Private Money to arrange deals. Just as with a regular mortgage, hard-money lenders can use the foreclosure process to seize real estate if borrowers default.

Pacific Private Money, in business since 2008, arranges 10 to 15 loans a month, mainly in the Bay Area, and mainly to investors, ranging from $150,000 to $500,000, Hanf said. Most are for 12 months with interest rates from 9 to 11 percent, plus three or four points paid up front.

Immediacy a big plus

Speed - closing a property sale in days - "is the single biggest reason real estate investor-borrowers use hard money," Hanf said. Tarnished credit - many investors lost properties to foreclosure in the downturn - is another strong motivation.

Pacific Private Money charges 0.5 percent to service loans and pockets the points, so, for instance, a loan at 10.5 percent nets the investor a 10 percent return.

A Danville man, who asked not to be identified for financial privacy, said he turned to Pacific Private Money when a last-minute holdup with a conventional mortgage threatened purchase of a new home. His banker steered him toward hard money.

"Initially I was skeptical, but as I looked into it, I was surprised at how efficient a market it was," he said. "I could move much more quickly that way, although I paid a price for it."

His $900,000 loan came with about 9 percent interest and two points. He'll do a cash-out refinance into a conventional mortgage within months.

And when he does, he plans to take out some extra money and put it to work with Pacific Private Money, becoming a hard-money lender himself.

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